Injuries can send workers' comp rates soaring

Tens of thousands of Ohio employers probably are pleased with the bargain-basement premiums they pay for workers' compensation insurance.

What they may not know is this: If a worker or two gets hurt on the job, their premiums could soar – enough to put a serious crimp in their business plans.

Consider the Decker family's oil-drilling company near Marietta. It has vowed to shut down before it bores another hole in Ohio soil.

Or Tamsin Haseley, who said she may be forced to fold her home-health-care company in Fairview Park.

Aladdin's Baking Co. in Cleveland had to lay off two workers because of suddenly skyrocketing workers' comp bills.

And Chris Skaggs says he and his company are holding on for dear life.

“It's been a struggle,” said the owner of Wise Heating & Air Conditioning in Galena. “I'm not sure we're going to survive it.”

All have at least two things in common with thousands of other Ohio employers.

One: They are facing sudden and dramatic increases in workers' comp costs because of employee injuries.

Two: They're all casualties of a flawed, state-sanctioned program that has allowed a handful of private, for-profit companies – with the tacit approval of the Ohio Bureau of Workers' Compensation – to manipulate the bureau's premiums for their own benefit and that of their clients.

The resulting distortions, according to insurance experts, have needlessly inflated Ohio's workers' comp rates for more than a decade. And they've collectively forced about two-thirds of the state's employers to pay hundreds of millions more in premiums than they should, while the other third pays less.

Enjoyed 95 percent premium discount until 2004.

Two workers got hurt — one lifting equipment, the other falling on ice.

CompManagement, Inc. removed company from group-rating.

Wise’s premium rate has soared — by 2,100 percent.

A portion of the higher payments — 7.25 percent — will go to CompManagement Health Systems, the company’s managed-care organization.

Enjoyed a 90 percent workers’ comp discount in 2005.

Two workers claimed serious falls — one on bakery floor, the other in freezer.

An insurance consultant stripped the company of its discount.

Aladdin’s premium rate increased 1,000 percent.

Expects to pay at least $70,000 more in annual premium.

These for-profit companies, called third-party administrators, or TPAs, have been allowed to sell artificially bloated premium discounts on workers comp premiums to employers that have few costly claims. The TPAs typically charge the employers a percentage of the amount the discounts save them.

Records show the TPAs have been allowed to ignore or bend restrictions recommended by the bureau’s insurance experts in order to maximize the size of the discounts they sell — driving up their fees.

And the TPAs have been allowed to snatch the discounts away — despite repeated warnings against the practice by the bureau’s outside experts — when an employer sustains a worker injury or two, driving its premium through the roof.

The flaws in the program, known as group rating, have introduced substantial inequities into the system’s rate structure, according to bureau documents.

The TPAs’ 99,000 group-rated clients, roughly 38 percent of all employers covered by Ohio’s Workers’ Comp system, pay much less than their records indicate they should be paying in premiums — because of the oversized discounts they enjoy. An outside bureau analyst estimates the underpayments at more than $870 million in the last three years alone.

While the cut-rate premiums may be good news for them — while they last — they must be subsidized by everyone else.

To offset the underpayments, the state’s base rates for workers’ comp are at least 20 percent higher than they should be, according to the bureau’s experts, making Ohio less competitive than its heartland rivals. And the roughly 160,000 companies that aren’t in the program are forced to pay much more than their records would justify.

(About 1,135 of Ohio’s largest companies, including The Plain Dealer, are self-insured for worker injuries and not covered by the state system.)

The program also has considerably raised the stakes of a worker injury — for employers and employees.

Instead of providing a no-fault insurance policy, group-rated employers’ low premiums may just be buying them a false sense of security.

The lucky ones won’t need anything more. But employers that sustain a costly injury or two are in for a nasty surprise.

At Aladdin’s in Cleveland, for instance, company officials say their projected workers’ comp costs have soared by more than $70,000 per year after two workers claimed injuries from workplace falls, getting the company tossed from group rating.

The rate for Healthcare Circle Inc. in Fairview Park increased by more than 1,800 percent after a visiting nurse slipped on ice in a customer’s parking lot, tore a shoulder muscle and got the company ejected from the program.

“It may put me out of business,” owner Haseley said. “I’m going from month to month.”

In 2004, a worker for Dean Decker & Son Inc. pulled the wrong drill lever at an Ohio oil well.

A rotating pipe knocked the driller and two of his helpers down, said company official Loretta Decker, “and just kept hitting them until it could be turned off.” Only one has returned to work, she said. The other two are on full disability.

“It was a one-accident thing,” Decker said. Federal job-safety investigators “deemed it wasn’t anything to do with us,” she said. “It was operator error.”

But no matter.

The company got the boot from its group. Its workers’ comp rate has shot up 2,260 percent, records show, threatening a cost increase of more than $185,000 a year at 2004 payroll levels.

Thankfully for Decker, located in Vincent, Ohio, there are wells to be drilled elsewhere, because Ohio is off-limits now.

“If we had to come back to Ohio, we would shut our doors,” Loretta Decker said.

“We would completely shut our business down, because we could not afford to have workers’ comp. Period.”

Key restrictions ignored or manipulated

Group rating wasn’t supposed to work that way.

Born of good intentions, the program was conceived around a bedrock principle of insurance — the law of large numbers. It was designed to neutralize a potential disadvantage that small Ohio companies faced in competing with larger companies in the same business.

Because they spread the risk and cost of injuries over a larger number of employees, the big companies’ records were a better predictor of future risk than that of smaller competitors, qualifying them for significantly lower workers’ comp rates.

But if the smaller companies were allowed to band together — with the entire group regarded as a single employer for insurance purposes — they could mimic the risk exposure of their larger brethren and equalize their rates.

That was the theory, anyway. And it provided the foundation for Ohio’s group-rating law, which took effect in 1991.

Several caveats — dealing primarily with how groups were formed and which employers would be eligible — were recommended from the start. The purpose was to ensure that the program adhered to sound insurance principles — allowing past records to accurately predict future liability — and to guard against the potential for rate manipulation.

But records show that officials during two Voinovich and two Taft administrations left the oversight of the new program almost entirely to the third-party administrators, the private companies that stood to gain financially from just such a rate manipulation: The bigger the discounts they could generate, the bigger the fees they could collect.

The caveats were either ignored or stretched beyond recognition.

The manipulation and rate distortion that experts had warned against in 1991 set in early, creating inequities that will be politically difficult to fix today.

When group rating began in 1991, an outside insurance consultant issued an unambiguous caveat: The bureau should prohibit the use of an employer’s claims experience as a criterion for group membership.

If allowed, the consultant warned, the practice would encourage the TPAs to “manipulate the premiums” of their groups by sculpting their membership lists to include only those employers with similarly clean records. That, in turn, would create entities that, based on the predictive power of their clean past, were unlikely ever to suffer a costly worker injury.

And that would undermine the program’s insurance integrity. Such artificially low risk could be used to generate unrealistically low premiums for group members and inappropriately high premiums for everyone else.

That’s exactly what has happened.

Despite the warning, state officials took a hands-off approach to group formation, leaving it to the third-party administrators to decide who could join and who could stay.

Claims history became a primary eligibility factor. And now, a costly claim or two can get an employer tossed from its group, catapulting its premium rate.

About 10,000 Ohio companies have been ejected from group rating since 2004, according to bureau data, and their premium rates have increased an average of more than 1,000 percent.

For more than a fourth of those, rates have increased by at least 1,900 percent.

These employers can try to mitigate the damage by attempting to settle with their injured workers — capping the claims’ potential costs — or by joining bureau-sponsored programs that can shave up to 40 percent from the new premium for eligible employers until they can work themselves back into a group. Many, however, are stuck with sky-high rates for up to four years.

It’s little wonder, then, that employers are fighting workers’ claims as never before: Records show the rate of disputes per serious claim has increased dramatically.

Employers facing a huge rate increase tend to take injury claims personally, said Stuart Garson, a Cleveland attorney who represents injured workers. “They’ve got a 20-year employee. The guy goes down; he blows out his knee. And all of a sudden he’s like persona non grata. It’s absolutely ludicrous.

“You get one damn claim now, and everybody’s at war with everybody.”

Robert Lowry had operated a residential painting company in Columbus for 42 years when a worker-injury claim got him tossed from his group, threatening to drive up his workers’ comp premium by up to $50,000 a year.

Lowry said he spent $60,000 on attorneys and private eyes to fight the claim — which he said the worker eventually settled — because he couldn’t afford not to.

The claim could have cost him $200,000 if it stayed on his record the full four years, Lowry said. “A small company can’t do that. I would have just shut the doors.”

Consultants warn about excessive discounts

Rate manipulation has been a persistent concern of the bureau’s insurance consultants.

Records show they have warned in at least six reports since the early 1990s that Ohio’s group-rating discounts are seriously out of whack.

Most recently, Pinnacle Actuarial Resources noted last month that if the program were managed properly, the maximum available discount would be less than 60 percent and the average around 45 percent.

But Ohio’s group-rating TPAs have routinely been selling premium discounts of up to 95 percent for years.

Despite modest recent efforts to scale them back — positive steps with “relatively small” impact, in Pinnacle’s view — the average group-rating discount this year is 83 percent, according to bureau data, nearly 40 points higher than Pinnacle says it should be.

And more than 87 percent of Ohio’s group-rated employers are getting discounts that exceed Pinnacle’s 60 percent maximum.

Fueled by the aggressive marketing of such huge discounts, participation in the program has ballooned from fewer than 20,000 employers in 1992 to nearly 100,000 today.

Lots of money is changing hands as well, although it’s unclear how much: Bureau officials say they have no idea how much the third-party administrators charge for the discounts.

But one of the largest TPAs notes in its promotions that its clients paid $1 in fees for every $14.58 saved, and that its group-rating services had saved employers more than $1.1 billion. At that rate, the TPA has collected $75 million in group-rating fees.

The steady expansion of the program may also reflect another early caveat ignored, this one dealing with group composition.

As Pinnacle noted last month, Ohio’s group-formation practices “reward groups that attempt to game the system.”

From the beginning, group members were supposed to be small companies in “substantially similar” businesses, according to bureau documents, so that the job risks they pooled would be “homogeneous” and so they could work together on common safety problems.

To that end, all groups were supposed to be sponsored by an existing organization — like a professional association — and each group member had to be a dues-paying member of the sponsoring agency.

But the bureau has allowed the group sponsors and their TPAs to so expand the definition of membership that wildly dissimilar businesses can be lumped together to create ever larger groups.

In 2004, for instance, bureau data show that Dean Decker & Son, the oil-drilling company, was placed in a group sponsored by the Professional Insurance Agents of Ohio.

Not only does Decker’s business have nothing to do with insurance, its fellow group members included such non-insurance-like operations as structural steel contractors, tree pruners and burglary-alarm installers — as well as architect and engineering offices, where the risk of serious injury is nowhere near that for an oil-well driller.

“That doesn’t make any sense from a risk-management perspective,” said national workers’ comp consultant Joseph Paduda. “It’s a prostitution of a solid industry concept.”

But it has made for a lively market in group-membership sales. Records show the insurance agents association sponsors 47 groups with 14,300 employers — making it the state’s largest group-rating sponsor.

Enjoyed a 90 percent workers' comp discount in 2005.

Two workers claimed serious falls – one on bakery floor, the other in freezer.

An insurance consultant stripped the company of its discount.

Aladdin's premium rate increased 1,000 percent.

Expects to pay at least $70,000 more in annual premium.

All those employers are required to pay annual dues to the association. Typically, members also pay an administration fee to the sponsor's third-party administrator – in this case, to Comp— Management Inc., Ohio's largest group TPA – to run the groups.

But records show that most employers in the association's groups have nothing to do with the insurance business. In fact, only about 6 percent are insurance agents, said association official George Haenszel: The rest are “associate” members who joined up just to get the group-rating benefits.

Both Haenszel and CompManagement Vice President Jon Wagner say the insurance agents' groups are formed just like everyone else's and that the bureau approves their composition. “The rules were created by the bureau,” Wagner said. “The TPAs and associations are just following them.”

If that's the case, the standards apparently have become so fluid that such operations as architect offices can be grouped together with roofers as “substantially similar” businesses with comparable risks. Bureau records show the insurance association's TPA has done just that, even though roofing companies are at least 33 times more dangerous.

Bureau officials had planned changes

Restoring true homogeneity – similar business, similar risk – to group membership, along with addressing long-standing premium distortions brought on by group rating, was among the top priorities of outgoing bureau administrator William Mabe as the new year dawned.

Armed with December's Pinnacle report, Mabe and other bureau officials had planned this month to outline a strategy before the bureau's oversight commission to restore the program to sound insurance principles.

That plan apparently is now on hold.

Mabe, a retired insurance executive, was named interim bureau administrator 15 months ago to try to right the scandal-plagued agency. He departed three weeks ago after the incoming administration of Gov. Ted Strickland told him it wants new bureau leadership. No replacement has been named.

But Mabe's plan was likely to be an uphill climb even if it had won Strickland's support.

Noting that Ohio's group-rated employers love their low premiums, business groups like the Ohio Chamber of Commerce are fans of the program and are poised to resist big changes.

Chamber President Andrew Doehrel disputes the Pinnacle analysis, arguing that group-rated employers have earned their big discounts by becoming more safety conscious and minimizing claims.

With over a third of Ohio employers participating, he said, “that's certainly not a bad thing.”

As for the 160,000 not in the program – those that Pinnacle says are paying more than their claim records justify – some are too small to make group rating worthwhile, bureau officials say. Others may not know about the program.

But according to CompManagement's Wagner, most were rejected – or never invited in – because they had injuries that could have been avoided if the employers had good safety programs. “Claims are preventable, to a large extent,” he said.

Wagner acknowledged that a discussion may be in order on whether the current system is fair. But if the program is altered based on Pinnacle's report, he said, premiums would go up, perhaps substantially, for the nearly 100,000 employers whose safety records got them in.

“We have to decide, in the state of Ohio, if we want to do this,” Wagner said.

But group-rating reform could substantially shrink revenue for Wagner's company and its fellow TPAs as well, by shrinking the size of the discounts they could sell. CompManagement and five others control 86 percent of the group-rating market.

And in Mabe's view, the arguments in favor of a fix are compelling.

Fixing group rating would make workers' comp premiums fair again, he said, to all employers.

But it would also lower overall rates – substantially enough to temper the impact on the program's participants. And that would allow Ohio to compete more effectively with states like Michigan and Illinois to attract new business.

As for the timing, Mabe said, claims and expenses are down and the bureau is sound financially. “The solutions are teed up,” he said. “Now's the time.”

Such talk is music to Chris Skaggs, who is struggling to run a heating and air-conditioning business in a shriveling, central Ohio housing market while coping with the aftershocks of a pair of worker injuries.

“When your income falls by 60 percent and you're paying more for everything, it really hurts,” Skaggs said. “They're putting small businesses out of business.”

Two claims – one worker seriously hurt his back lifting a generator off a truck Skaggs said, the other slipped on some ice – got his company booted from its group in 2005.

His premium rate, records show, has increased by 2,100 percent as a result.